Business Model Generation: Yahoo
Business Model Generation: Yahoo
Yahoo is an internet pioneer and one of the best-known corporate names in the USA and world-wide. The future of the company, though, is very much in doubt. Revenues and profits are down, and the share price has fallen from $49 to $29 in the past twelve months. Yahoo Mail (email) crashed several times during 2015. There is an exodus of managers, and a growing morale crisis (MacMillan). Rumors abound that the company may sell its core internet businesses, including its search engine and email services as well as its news and sports sites and proprietary advertising technology. And Yahoo is still trying to spin off of its $30 billion stake in Chinese e-commerce giant Alibaba (Hall). Influential stakeholders are seeking to oust CEO Marissa Mayer (though her severance package could cost the company in excess of $100 million)(Primack).
This paper will examine Yahoo’s current business model, and then propose a new business model based on the ideation process, as developed and so-named by Osterwalder and Pigneur in their landmark work (135-136).
Yahoo sells digital display advertising on the internet. The world-renowned Yahoo search engine is offered free to users (as are Yahoo Mail and Yahoo! Messenger), creating a vast and captive global market for Yahoo’s advertiser clients. However, internet advertising revenues have been shrinking industry-wide in recent years, due to increased competition and a shift in the market towards mobile users, where Yahoo lags behind (Benner). Under CEO Marissa Mayer, Yahoo has tried several new expensive strategies to protect the company’s core business (Castillo).
A New Business Model
What Yahoo really needs is a totally new business model, derived from innovative thinking through the process of ideation: “a creative process for generating a large number of business model ideas and successfully isolating the best ones”. This process requires “ignoring the status quo and suspending concerns over operational issues” so as to allow “truly new ideas”. Ideation is not about keeping up with competitors (e.g., Google). It is not about looking back, but looking forward, finding new ways to create value, to find new customer needs and new sources of revenues. It is not about a half-hearted reinvention, but rather, a complete reinvention. Ideation means starting with a blank canvas (Osterwalder and Pigneur 135-137).
New ideas can come from various “epicenters” within a business. They can be resource-driven, offer-driven, customer-driven, finance-driven, or a combination of those (Osterwalder and Pigneur 138-139).
Old Value Proposition
While most people probably still think of Yahoo as an internet search engine, today Yahoo defines itself as “a guide focused on informing, connecting, and entertaining our users”. The company claims that by “creating highly personalized experiences for our users, we keep people connected to what matters most to them, across devices and around the world”. With digital display advertising as its main revenue source, it purports to “create value for advertisers by connecting them with the audiences that build their businesses” (Yahoo). In short, despite a lot of high-profile changes, Yahoo’s product has remained the same – advertising. It has diversified not by changing its product, but by going to great lengths to hold onto its user base, key to its advertising business.
In doing so, Yahoo has struggled to overcome two big challenges: a decline in display advertising (Yahoo’s primary source of revenue) across the industry, and the new pressures brought upon itself by trying to do too many things at the same time (Goel 2016). Now in her fourth year as CEO, Ms. Mayer has acknowledged difficulties in growing Yahoo’s core business of advertising, and suggested that further reorganization may be coming soon. She has signaled that Yahoo will adopt yet another new strategy to refocus the company, while moving further into mobile (MacMillan). In other words, Yahoo intends to dig in even deeper with the same old business model.
New Value Proposition
For Yahoo’s new business model, there is one “epicenter” that stands out – Alibaba. As a major ally already in place, Alibaba’s vast resources should be a big part of the Yahoo solution. In ideation terms, the Yahoo solution would, first and foremost, be a resource-driven one. At the same time, Yahoo has many millions of loyal and potential customers, who are still there, and who must also be part of any solution. So Yahoo’s solution should also be customer-driven.
Alibaba is a giant e-commerce company, with most of its sales in Asia. Alibaba might fairly be considered the Amazon of Asia (though their business models are somewhat different). Rather than divesting its stake in Alibaba, or selling out to Alibaba, Yahoo should join forces with Alibaba. While Amazon enjoys a free reign over the North American market, with nearly $89 billion in 2014 sales, there is room for competition in North American online retailing (Trefis Team 2015a). Alibaba commands nearly 80% of China’s e-commerce market, while Amazon has close to 30% share in the U.S. market. Alibaba is more flexible and better poised for growth than Amazon (Trefis Team 2015b). Combining the popular Yahoo brand with the Alibaba e-commerce infrastructure, a new Yahoo/Alibaba company could be created to compete with Amazon inside North America.
Old Clients
Yahoo’s traditional paying clients are advertisers. That core business – sales of digital display ads on the internet – has fallen off sharply, due to increased competition and a shift from desktop to mobile usage, where Yahoo has not yet made great strides. Yahoo, in short, is dealing with “a structural decline”, which may be irreversible (Benner). Complicating that trend, Yahoo Mail experienced several outages in 2015, which may or may not have been caused by a severed underwater cable (Shuler). In any case, due to the length of the outage Yahoo Mail may already have lost many users to Gmail or Outlook (Page). In other words, the company’s cherished ”hi-tech” reputation has also been compromised.
New Clients
Yahoo’s new clients would be online retail purchasers. Combining the popular Yahoo brand with the Alibaba e-commerce infrastructure, a new Yahoo/Alibaba company could be created to compete with Amazon, and take part of Amazon’s North American market share in online retail sales. Needless to say, many existing Yahoo users could become Yahoo/Alibaba customers.
Old Relationships
Today, Yahoo’s most important relationships are with its global audience of search engine users (and Yahoo Mail and Yahoo! Messenger users), the backbone of its advertising business. As the user count has shrunk, Yahoo has sought to rebuild it by adding value to its traditional products. Unfortunately, it is not going according to plan. None of Yahoo’s recent forays in mobile, social media or video are growing fast enough to compensate for the decline in the core advertising business. The new businesses comprise about one-fifth of the company’s total revenue, so, at best, 20 percent of Yahoo may be growing but 80 percent is still shrinking (Benner). Determined to become a major content provider in news, sports and entertainment (including original content), the company had hired senior Hollywood and TV executives to push forward with a planned expansion into these arenas. But investments in high-profile content (including live streaming of an NFL game), and in an offering of new mobile apps, have so far failed to attract significant new advertising income (MacMillan). Those plans are now being reconsidered, and some of those entertainment executives have already left the company (Depra).
One notable sign of desperation (and probably hard to swallow for Yahoo stakeholders) was the signing of a new three-year venture with Google, for sharing search and advertising functions and revenues, and supposedly helping Yahoo shore up its core business (Rosoff).
New Relationships
In a total reversal, Yahoo’s new focus would be on online retail customers. But rather than just competing on Amazon’s terms, Yahoo/Alibaba could bring more to the table. Building on Yahoo’s existing customer base, brand loyalty, advertising technologies, and experience in communications, email, and content, Yahoo/Alibaba could develop, through a “cultural” approach, a new retail brand following specifically aimed at bringing Chinese and American consumers closer together. Yahoo/Alibaba could position itself as the “arbiter” of the China – U.S. relationship, not politically, of course, but across cultural lines like news, sports and fashion. What do Chinese want to know about Americans? And vice versa? What U.S. TV shows are watched in China? What high-end Chinese products would be well-received in America? What content (news, sports, entertainment, apps) should be translated, and why should Yahoo/Alibaba not be the leader in translating technologies? By defining and/or creating these interfaces, and then controlling them through content and apps, Yahoo/Alibaba could stake out a whole new territory, and gain a great marketing advantage for its new internet retail business in North America.
Old/New Channels
The internet is Yahoo’s principal channel of communication with customers, and this would remain the same.
Old/New Revenue Streams
Advertising revenues would be replaced by online retail sales as the company’s main source of revenue.
Old/New Key Partners
With no search engine structure to maintain, the Network Service Providers (NSP), Internet Service Providers (ISP), and wireless mobile phone carriers (Verizon, AT&T, Sprint, etc.) would no longer be needed as partners. The new three-year deal with Google would not be renewed. Alibaba and the major delivery companies (FedEx, UPS, etc.) would become the company’s new key partners. There would still be an important role for software (app) developers and content providers, but it would be in support of the retail operation as opposed to the old advertising business.
Old/New Key Resources
The contractual agreements with NSP and ISP, wireless carriers and Google would fade away. Data would still be a key resource, though it, too, would be put to a different use. The Alibaba e-commerce infrastructure would become the most important key resource in the new Yahoo/Alibaba.
Old/New Key Activities
The search engine infrastructure would be gone. Advertising would be dropped as a business. Building a new Yahoo/Alibaba presence in the USA would become the primary activity, and this would include a retail, warehousing and delivery infrastructure. Other activities would be building US – China user communities, and here, developing content and apps would still be an important function, but now in support of the retail mission.
Old/New Cost Centres
All the old cost centres would be gone (NSP, ISP, wireless carriers for access and capacity). Whereas in 2015 the company invested heavily in original web content (taking a $42 million write-off in the third quarter), these costs would be reduced dramatically. New retail, warehousing and delivery infrastructure would represent the great majority of costs under the new business model. Content providers and software developers for apps would be a smaller cost category.
Conclusion
As 2015 came to a close, Yahoo was still struggling to divest its stake in Alibaba, “the asset that fueled Yahoo's remarkable stock surge during the Mayer years”. Yahoo stock price had risen to as high as $49 during Mayer’s tenure (from $15), but in retrospect that may have been thanks to the Alibaba ties (today Yahoo stock is around $29). If the Alibaba stake is sold, Yahoo's core problems will no longer be hidden by that buffer, and the stock price is likely to suffer dramatically (Benner).
In the media, there is no shortage of suggested solutions to the Yahoo crisis. Some have said that Alibaba should buy out Yahoo, and Alibaba Chairman Jack Ma has apparently endorsed that idea (Benner). Another oft-discussed option is for Yahoo to pair its Alibaba stake with an existing operating company and then spin them off together, though that raises a new risk – that private equity investors will simply break up the company and sell it off in pieces (Benner). These are all old-style “solutions”, aimed at propping up a dying business model.
What Yahoo really needs is a new business model, derived from innovative thinking, through the process of ideation. With a major ally like Alibaba already in place, there are vast resources for the taking, which should be part of the solution. And Yahoo’s solution should, first and foremost, be a resource-driven one. At the same time, Yahoo has millions of loyal customers who must also be part of any solution; and so Yahoo’s solution should also be customer-driven.
Combining the popular Yahoo brand with the Alibaba e-commerce infrastructure, a new Yahoo/Alibaba company could be created to compete with Amazon, and take part of Amazon’s vast market share. Rather than just competing on Amazon’s terms, though, Yahoo/Alibaba could bring more to the table. Building on Yahoo’s existing customer base, advertising technologies, and experience in communications, email, and original content, Yahoo/Alibaba could develop, through a “cultural” approach, a new retail brand following specifically aimed at bringing Chinese and American consumers closer together. By defining and/or creating new interfaces, and then controlling them through content and apps, Yahoo/Alibaba could stake out a whole new territory, and gain a great marketing advantage for its new internet retail business in North America.
References
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